The Corporation and Financial Markets Flashcards
What are the 4 types of firms?
- Sole Proprietorship
-Partnership
-LLC
-Corporation
What are the key characteristics of a sole proprietorship?
-Easy to set up
-No separation between the firm and the owner
-No other investor can hold an ownership take in the firm
-Owner has unlimited personal liability in the firm’s debts
-Life of the company is limited to the life of the sole owner
-Difficult to transfer ownership
What are they key characteristics of a partnership?
-All partners are liable for the firm’s debt
-Partnership ends on the death or withdrawal of any single partner
What is the difference between a partnership and a limited partnership?
-A limited partnership is when some partners have their liability limited to their investment in the firm
-These partners often have no management authority
What are the key characteristics of an LLC?
-All partnerships are limited
-No general partner
What are the key characteristics of a corporation?
-Legally defined, artificial being separate from the owners
-Corporation is solely responsible for its obligations and owners are not liable for any of the corporation’s obligations
-Must be legally formed (Costly)
-No limit on the number of owners, purchased through shared
-Double tax system (CT + personal)
-S Corporations are exempt from CT tax
Who are the key members of the corporate management team?
-CEO: Responsible for running the corporation
-CFO: Responsible for investment, financing and cash flow decisions
-COO: Operational decision making
What is the main aim of the firm?
To maximise shareholder value (lol)
What are potential, negative societal impacts associated with increasing the value of equity?
-ESG
-Modern Slavery
-Irresponsible Investment (e.g. 2008)
What is the Agency Problem?
-Managers have little incentive to work in the interests of shareholders if it means working again their own self-interest
What are solutions to the agency problem?
-Minimise the number of decisions managers have to make contradictory to their own self interest
-Tie compensation to performance
-However this can lead to
excessive risk taking
What is the key motivator for company performance with an entrenched CEO?
-Threat of a hostile takeover
What are corporate bankruptcy procedures?
-US: Liquidation or Chapter 11 Restructuring (cram-down)
-UK: Liquidation, CVA, Trading/Pre-Pack Administration, Restructuring (SoA or RP with cram-down)
What is the purpose of stock markets?
-To provide liquidity
-To determine a market price for company shares
-Share prices provide feedback to managers
What is the primary market?
-This is when shared are purchased at issuance
What is the secondary market?
-This is when shares are traded between investors
